Intermediate Cross-Sectional Prospect Theory Value in Stock Markets : A Novel Method

This study examined the predictive power of performance persistence from the perspective of prospect theory using 12 months of return distributions. Performance persistence stems from unique information that differs from momentum, disposition effect, and firm-specific variables related to the trading behaviors of individual investors. The novel cross-sectional prospect theory value (CSPTV) measurement, designed to reflect cross-sectional comparison across the return distributions for all stocks, captures this unique information better than the existing prospect theory value (PTV), which is specific to a single stock. In other words, CSPTV improves the predictive power of prospect theory by providing performance with a larger magnitude and of greater significance than that of PTV. Consequently, this study anticipates differentiated contributions from the CSPTV design, which expands the application scope of the existing prospect theory to the past 12-month return distribution and improves the prediction power of prospect theory in cross-sectional stock returns